Investigating the Nexus Between Foreign Direct Investment and Export Performance: Empirical Evidence from Somalia

Abstract

This study examines the impact of foreign direct investment (FDI) on export performance in Somalia from 1977 to 2017, using annual time series data from the World Bank and the Statistical, Economic, and Social Research for Islamic Countries (SESRIC). The research utilized a vector error correction model to examine the relationship between foreign direct investment (FDI) and export performance, while controlling for GDP and exchange rate. Other econometric techniques employed are correlation tests, the Johansen Cointegration test, and Granger causality tests. The results indicate a weak but positive correlation between FDI and exports and a negative association between GDP, exchange rate, and exports. The Cointegration test confirms the existence of a long-run equilibrium relationship among the variables. However, the Granger causality test reveals no causal relationship between FDI and export performance, suggesting that FDI does not significantly influence exports in Somalia. Limitations of the study Somalia faces many challenges including civil war, pirates, currency depreciation, corruption, lack of human capital, macroeconomic stability and corruption not owning to data availability. The study highlights the need for policymakers to develop targeted strategies to attract export-oriented FDI and create an enabling environment for domestic firms to benefit from spillover effects. Further research is recommended to explore the sector-specific impact of FDI on exports and the role of institutional factors in mediating the relationship between FDI and export performance in Somalia.